• Maintain BUY and SOP-derived MYR1.44 TP (61% upside), c.3% yield. 9M24 results met expectations, with Texchem Resources’ polymer engineering and industrial divisions continuing to rebound strongly. New CEO Dr Yuma Konishi is committed to rejuvenating the business by ensuring sustainable growth and improving operational efficiency. The current 7.1x FY25F valuation is undemanding and presents an attractive opportunity to enter a diverse business set to benefit from a sustainable earnings recovery.

• Within expectations. 9M24 core profit of MYR3.8m (9M23: -MYR7.1m) was in line with our expectations. We anticipate stronger earnings ahead, across all business units. Note that we adjusted for unrealised FX losses of c.MYR3.1m due to the recent strengthening of the MYR, on revaluation of balance sheet items.

• Results review. YoY, 9M24 revenue grew 13.2% to MYR851.2m on volume recovery from the industrial (+18.2%), polymer engineering (+26.6%) and restaurant (+4.5%) divisions, despite being offset by the food (-6%) division. 9M24 EBITDA margin grew 0.6ppts to 7.4% with improvements in the industrial and polymer divisions from higher sales and operating leverage (despite the substantial FX loss), offset by higher input and operating costs in the food and restaurant divisions. QoQ, 3Q24 sales fell 4.7% to MYR280.8m, but core profit grew 328% to MYR4.2m due to a better product mix in the industrial and polymer divisions, which led to lower sales but higher margins.

• Growth engines. The polymer engineering division is set to benefit from the recovery in the hard disk drive (HDD) and semiconductor sectors, with steady growth from medical life science clients. New high-margin projects are ramping up, with more initiatives in the pipeline, supporting margin expansion and positive operating leverage. In the industrial segment, management's focus on bulk chemicals is seeing positive outcomes, with anticipated increases in sales and market share. The recent rise in chemical prices should boost margins in the near term, driven by lower inventory costs.

• Operational enhancements. For the restaurant division, management plans to enhance the menu, expand into suburban areas that yield better profitability, and enter the Indonesian market, while the MYR appreciation should reduce raw material costs. While the food division may continue to see challenges from FX controls in Myanmar, management aims to boost local demand and diversify the supply chain to Thailand by 4Q24 to mitigate these effects.

• Forecasts and ESG. Maintain earnings forecasts and MYR1.44 TP (includes 0% ESG premium/discount), as results were in line. Our TP implies a blended 11.5x FY25F P/E. Key risks: Escalation of input costs, weaker-than-expected sales/orders, fluctuation of chemical prices, and unfavourable FX rates.

Source: RHB Research - 25 Oct 2024